Top German regulator says no to London HQ for Deutsche Boerse-LSE

By Jonathan Gould, John O'Donnell and Huw Jones

By Jonathan Gould, John O'Donnell and Huw Jones

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By Jonathan Gould, John O'Donnell and Huw Jones

FRANKFURT/LONDON (Reuters) - Germany's financial market regulator delivered a double blow to London on Tuesday, saying it could not host the headquarters of a planned European stock exchange giant after Britain leaves the EU, and nor could it remain a centre for trading in euros.

Felix Hufeld, who heads the Bafin regulator, is the most senior official to rule out London publicly as the head office of the merged Deutsche Boerse-London Stock Exchange group after Britons voted last week to leave the European Union.

Adding to uncertainty over the City of London's future, an EU official said the European Central Bank would push for the clearing of euro transactions to move to the common currency area within a couple of years.

Hufeld's remarks underline the vulnerability of what is currently Europe's dominant financial centre, with London's mayor trying to limit the damage while rival Paris wants to capitalise on the fallout from Thursday's referendum.

"Without doubt ... it is hard to imagine that the most important exchange venue in the euro zone would be steered from a headquarters outside the EU," Hufeld told reporters. "There certainly has to be an adjustment here."

Hardening positions in Germany, where politicians have made similar remarks, have created an additional hurdle to the planned $25 billion merger, which is now in danger of unravelling after Britain opted from Brexit.

Deutsche Boerse <DB1Gn.DE> declined to comment. An LSE <LSE.L> spokesman said shareholders would vote on the deal - which was first announced in February - on July 4 and the offer terms were unchanged.

As Germany's top supervisor, Hufeld's comments hold considerable weight and jar with recent statements from the LSE and Deutsche Boerse that the deal to create a European trading powerhouse will go ahead as is.

Bafin answers to Germany's finance ministry, led by minister Wolfgang Schaeuble. A spokeswoman for the ministry said supervisory authorities continued to examine the merger.

A special committee created by the exchanges to deal with the referendum fallout will meet in the coming weeks to discuss the implications, including for the merged company's base.

The British government has signalled that it won't formally inform the EU of the country's intention to leave until after the summer. Without this step, a two-year period to negotiate the divorce under the EU's Lisbon Treaty cannot begin.

EURO LOSS

Hufeld, who also sits on the ECB's supervisory decision-making board, also said that London could no longer expect to be the centre of euro-denominated trading.

Such trading should move to the EU and could take place in Frankfurt, he said.

"I would see this as a significant political goal to think about steps to encourage this. It cannot be politically smart for a significant amount or a majority of euro-denominated trading ... to take place outside the European Union."

The loss of trading of euros in derivatives would be a heavy blow to London.

Before the vote, euro zone officials had told Reuters that the ECB was determined to tackle an anomaly dating from 1999 when Britain opted out of the euro's launch - that a dominant share of trading in the currency the ECB issues happens outside its jurisdiction in London.

When Britain leaves the EU, there is little incentive to keep this business there. Trading of euro-based securities spans trillions of euros of derivatives as well as the "repo" market providing short-term funding for banks – 2 trillion euros of which experts say is based in London.

In addition to this, there is foreign exchange trading in the currency itself. The Frankfurt-based ECB wants oversight for practical reasons: if any disaster were to hit these markets, it would be responsible for clearing up the mess.

The exit vote prompted Mayor Sadiq Khan to call for more autonomy for London such as tax-raising powers and control over areas including business and policing.

He also wants London - Europe's richest city which against the national trend voted strongly to remain in the EU - to have a seat in negotiations with Brussels over Britain's future relations with the bloc.

Khan, who backed the Remain campaign, borrowed language from Brexit supporters who said Britain should leave the EU to regain control of policies such as immigration.

"London has to take back control too. Londoners, who voted for a different path to the rest of England, need more self-determination," he said. "We need to control our own destiny."

Rival Paris is gearing up to attract London bankers.

SocGen's <SOGN.PA> chief executive, Frederic Oudea, said the French capital could benefit as financial institutions based in Britain would no longer have access to European markets as they had before.

Swiss Bankers Association Chairman Patrick Odier also said the uncertainty from Brexit could benefit his members.

"It will ... probably make the value of the Swiss proposition – stability, predictability, state of law, strong currency - even more forceful than it was in the past," he said.

Heinz Geyer, an executive recruiter at Temple Associates, said some thousands of jobs could leave London over time.

But he added: "England has a strong dealing oriented tradition," he said. "It is hard to see how there would be such a large exodus of people from London."

He conceded, however, that much depended on the terms of any trade agreement that Britain gets after it leaves the bloc. "One can only hope that the negotiators have steel to secure the best deal."

(Additional reporting by Matthias Sobolewski in Berlin, Maya Nikolaeva in Paris, Joshua Franklin and Brenna Hughes Neghaiwi in Zurich, William James and Sinead Cruise in London; Editing by David Stamp)